The impact of capital requirements on Swedish bank lending: A study on the effects of higher capital regulations

Abstract: The increased capital requirements, as a result of Basel III regulations, have been widely debated among bankers, regulators and other agents. In this thesis, we aim to evaluate if the increased capital requirements have had an effect on bank lending in Sweden. To analyze this, we gather quarterly data from the four largest Swedish banks and divide lending to the public into five categories. We use a dynamic panel regression on our novel data set and regress loan growth for the different lending sectors on increased capital requirements. We find that the increased capital requirements seem to have no effect on loan growth for any of the sectors analyzed. Also, we find indications that capital ratios have been affected by higher capital requirements since the banks seem to gradually rebuild their capital buffer that they initially held above the regulatory minimum. We conclude that regulators seem to have been successful in not harming Swedish banks’ lending behavior.